Over the past two months, the nearly 122-year-old Dow Jones Industrial Average (DJINDICES: ^DJI) has been mired in quite the slump. Over a span of 13 days, the Dow fell just over 10% from its all-time high, marking its first correction in more than two years. It also registered four of the nine largest single-day point declines in its history: 666 points, 724 points, 1,033 points, and 1,175 points, the latter of which is good enough for its largest single-day drop, ever.
While fear has abounded as volatility has picked up, investors often forget how good they've had it over the long run. Sure, the Dow may have dropped by more than 3,000 points for a brief period below its all-time high set in January, but it had also climbed by 88% from its closing high before the Great Recession, and quadrupled since hitting its low in March 2009. Comparatively, the 10% decline that investors have dealt with recently is hardly worth fretting over.
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Dow 50,000, 100,000, and 1,000,000 could happen sooner than you realize
However, if we zoom out even further, we can see just how impressive wealth creation has been over the long run. Mind you, over the past 100 years we've dealt with the tail end of World War I, the entirety of World War II, the Korean War, the Vietnam War, and the Gulf War, as well as the Great Depression, the Great Recession, the dot-com bubble, and Black Monday in October 1987. Despite it all, the Dow Jones Industrial Average rallied from a closing value of just 76.68 on Jan. 2, 1918, to 24,824.01 as of Jan. 2, 2018. On a nominal basis, that's a return of more than 32,000%. But on a compound annual basis (using Bankrate's return on investment calculator), it represents a healthy return of 5.95% a year.
As investors, we know that the stock market rarely adheres to averages. It marches to the beat of its own drum and rises and falls with news that most investors, including seasoned Wall Street analysts, didn't see coming. But if this 100-year, 5.95% compound annual growth rate (CAGR) were to maintain itself, it would probably produce some major milestones for the Dow in a much shorter time span than most folks realize.
On Wednesday, March 28, the Dow Jones closed at 23,848. Assuming a 5.95% CAGR, Dow 50,000 could occur in just shy of 13 years from now. In other words, we could be looking at Dow 50,000 by the first quarter of 2031.
Dow 100,000 isn't that far off, either, on a relative basis. Should the averages hold, Dow 100,000 is possible 25 years from now, in 2043.
Even Dow 1,000,000, which might seem laughable given how far away it seems on a nominal point basis, could be something today's newest workers see during their lifetimes. At a 5.95% CAGR, we'd reach Dow 1,000,000 in 65 years, or the year 2083. In theory, some workers could be alive to see the Dow grow from a four-digit index in 2009 to a seven-digit index by an estimated 2083.
A key data point to keep in mind
What's the point of all of this long-term extrapolation, you might wonder? Namely, to highlight the fact that high-quality stocks, such as you'd find in the Dow or broad-based S&P 500 (SNPINDEX: ^GSPC), tend to increase in value over time.
Whenever the stock market inevitably dips, one of the best ways to calm your nerves is to examine data from Wall Street analytics company Yardeni Research. Yardeni's data shows that the S&P 500 has undergone 36 corrections -- i.e., a drop of 10% or more -- since 1950. That's about one every two years, and it shows just how common it is for the stock market to go through rough patches.
More importantly, however, Yardeni Research's data shows that these corrections tend to be erased rather quickly on most occasions, with all declines, be they corrections or bear market declines (drops of 20% or more), eventually erased by bull market rallies. In essence, if you regularly buy high-quality stocks, such as those found in the Dow or S&P 500, and you ride your winners for long periods of time, your nest egg should grow.
It really is that simple.
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